Bell Asset Management sees strong earnings growth despite global GDP slowdown

Ned Bell

Global equities boutique manager Bell Asset Management believes company earnings growth, especially in the small to mid-cap sector, will continue to provide great opportunities for investors despite signs of a slowdown in global GDP growth and rising inflation.

At a virtual event held in Melbourne, Ned Bell, Chief Investment Officer, Bell Asset Management, said the outlook on global growth was changing because of clear signs of a slowdown in China, led by a drop in property market activity.

“If you look at the most recent Chinese GDP figures, growth came in at 4.9% in Q3, down from 7.9% in the previous quarter. That’s a big drop, and if you think property investment represents 30% of Chinese GDP, it’s a big part of the Chinese economy”, said Mr Bell.

On the positive side, Mr Bell said consumer spending has maintained its robust level during 2021, especially in the US, and that is set to continue to drive growth into next year.

Bell Asset Management is forecasting global GDP to grow by 4.5% in 2022, moderating from an expected 5.9% this year. China’s growth rate is likely to drop from 8.1% this year to around 5.5% in 2022.

The rising oil price and sharp increases in other commodity prices, however, look set to underpin a steadily growing inflation rate, which is being exacerbated by the prospect of a sharp pick up in wages.

“Wage inflation is becoming more of an issue, and we believe this is going to be an issue for some time. One of the side effects of Covid-19 is that you have a lot of people rethinking their lives and their willingness to work, and this is causing some real labour constraints across multiple geographies and multiple industries,” he said.

“You have a situation where GDP is starting to moderate at the same time as inflation is rising,” Mr Bell said. He believes the rise in the inflation outlook and the decelerating growth in China could have a big impact on emerging markets.

“I think the earnings risk in emerging markets is quite meaningful,” he said.

Earnings rebound will drive markets

Despite the changing economic backdrop, the corporate earnings outlook across most markets remains very positive, according to Mr Bell. He pointed out there had been a 37% growth in earnings per share in 2021 for companies in the MSCI World Index but the market had only recovered about 30% from pre-Covid levels.

“Earnings have had this amazing recovery, but the market hasn’t necessarily kept up,” Mr Bell said. He noted this gap between earnings growth and share price recovery was most pronounced among small and mid-cap companies (SMID).

“In the small and mid-cap market, the disconnect between the earnings recovery and the price recovery is effectively around 40%. That represents a massive opportunity,” Mr Bell said.

“The earnings recovery is being driven by a revenue recovery driven by government measures to help the economy but also a lot of the temporary cost reductions driven by Covid-19 are likely to become more permanent. I don’t think this is very well understood by the market generally,” he said.

Pragmatic and integrated approach to ESG investing

During the event, Mr Bell talked about responsible investing and Bell’s approach to Environmental, Social and Corporate Governance (ESG) investing.

“We have a pragmatic and integrated approach to ESG. As a quality focused investor we are naturally aligned with companies that not only have very good ESG characteristics, but they need little encouragement to put in place policies to improve their ESG outcomes,” Mr Bell said.

He said a key approach by Bell Asset Management is to assess the ESG risks facing a company and then identify what the company is doing to alleviate them and encourage the company to share these views.

Facebook shares a sell

This approach had led Bell Asset Management to sell its entire position in Facebook.

“Facebook have had ESG issues for some time and effectively have been on watch for us for about two years,” Mr Bell said. We’ve been looking to see their response to the criticism they have faced from regulators, especially in the U.S. We have got to the point where we felt that they are not doing enough. We ultimately got to the point where we felt they were not willing to make some hard decisions to improve their outcome. And their unwillingness to improve their game will ultimately have an impact on their earnings,” Mr Bell said.

On the buy side, Mr Bell singled out three small cap firms − GN Group, Intertek and Amedisys Inc – which have recently been added to the portfolios after a pull back in their share price.

“What all these names have in common is that we have been patient in buying into them, waiting for the right price. Looking ahead, over the next 12 to 18 months, we are confident these companies will see some earnings expansion,” Mr Bell said.